Thursday, 3 June 2010

Stefan Karlsson is wrong about Beavis and Butterhead.

Beavis and Butterhead were given candy bars to sell by their school. Plus they were given a small cash float. B & B failed to sell any candy bars.

But they were quite keen on eating them. So they used their borrowed cash to buy the bars from each other and eat them. End result: same stock of cash with which they started, and all the candy bars gone.

See here for more on this riveting and tragic story.

Stefan Karlsson claims this is the equivalent of Keynsian money printing. Stefan rarely makes mistakes, but he has here.

The first mistake here is that Keynes’s basic proposition was to have government borrow and spend, the net result of which is the production of government debt (Gilts in the UK or Treasuries in the US). The net result is not extra printed money. However, government debt in the “Gilt Treasury” form is not vastly different from government debt in the form of monetary base (which appears as a liability in central bank balance sheets, and which is thus, at least nominally, a “debt” of the “government central bank machine”.) So that’s a technical quibble.

Second and more important, the brute reality is that if the private sector is deleveraging and/or hoarding cash, it is not spending that cash. That in turn means less demand. That in turn means unemployment.

Put another way, an increased private sector desire to save (cash) means unemployment unless the public sector supplies the extra cash.

And that is not to suggest that we can grow rich just by printing bits of paper with “$100” inscribed on them. But these bits of paper are our economies’ currencies. And the total volume of currency in private sector hands has an effect.

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